CMS Proposes Rule With Significant Medicaid Financing Implications

Manatt on Health: Medicaid Edition

Over the past several years, federal Medicaid oversight and advisory bodies, including the Government Accountability Office (GAO) and the Medicaid and CHIP Payment and Access Commission (MACPAC), have issued reports calling on the Centers for Medicare & Medicaid Services (CMS) to strengthen its monitoring of supplemental payments1 and certain mechanisms states use to fund the state share of Medicaid program costs—namely, provider taxes, intergovernmental transfers (IGTs), certified public expenditures (CPEs) and provider donations.

On November 18, CMS published a proposed rule that codifies existing policies, establishes new policies and requires significant new reporting from states. The proposals would have significant implications for the ways that states finance their Medicaid programs and pay for services—with the most dramatic ramifications for how states use IGTs and provider taxes. Because states use these financing mechanisms to cover the non-federal share of a large portion of Medicaid expenditures, the new provisions, if finalized, could have a profound effect on states’ abilities to maintain payments at current levels and, concomitantly, on beneficiary access to care.2

CMS’s stated intent is to provide clear guidance to states on rules that “have been subject to misinterpretation by states and other stakeholders, or that otherwise could benefit from additional specificity.” However, in many places, the proposed rule would give CMS broad discretion to determine whether a particular arrangement passes muster, making it less, rather than more, clear to a state whether a given arrangement will comply with the requirements.

The proposed rule would:

(1) Limit the use of IGTs and provider taxes to finance the state share of Medicaid costs by granting CMS greater discretion to approve or disapprove state financing approaches. While the proposed rule would grant CMS substantial discretion to identify impermissible financing arrangements, key provisions would likely have the following implications:

  • Reduce the number of providers eligible to make IGTs by narrowing the definition of public providers.  
  • Cap the amount of funds governmental providers can use to make IGTs based on the provider’s state or local tax revenue (or funds appropriated to a state teaching hospital), significantly limiting use of IGTs as a state financing source, particularly for state university hospitals.
  • Prohibit voluntary “pooling” arrangements among hospitals that are designed to ensure all hospitals receive more in payments than what they pay in provider taxes.
  • Constrain states’ ability to tax Medicaid utilization at a higher rate despite meeting technical regulatory (i.e., broad-based and uniform waiver) requirements.
  • Give CMS greater discretion to prohibit provider payment transactions that it views as creating impermissible provider donations.

(2) Limit physician supplemental payments. CMS proposes to set new limits on Medicaid supplemental payments to physicians and other practitioners at 50% of Medicaid base payments (75% for practitioners in underserved areas), rather than the current upper limit, set at the average commercial rate (ACR). Unless states increase base rates significantly, this requirement could lead to sharp reductions in the size of supplemental payments to physicians.

(3) Require states to explain how their supplemental payments are consistent with “economy, efficiency, quality of care and access” without defining CMS’s evaluation criteria, creating new uncertainties regarding the amount that can be paid to individual providers through a supplemental payment. Under statutory rules and current regulations maintained by the proposed rules, states can make supplemental payments to providers if they do not exceed an upper payment limit (UPL) that is applied to classes of providers (e.g., state-owned hospitals).3 Due to concerns that payments under the caps to individual providers may be excessive, the proposed regulation would codify what CMS characterizes as “current policy” that—when seeking approval or renewal of their authority to make supplemental payments—states must specify how the payments to individual providers promote “efficiency, economy, quality of care and access.” However, the proposed rule does not provide any specific criteria by which that standard will be applied by CMS.

(4) Impose significant new provider-level reporting requirements on states related to both non-federal share financing mechanisms and supplemental payments. The rule would require a host of new reporting requirements for states. Specifically, the rule would codify existing UPL demonstration requirements established under subregulatory guidance4 and add new quarterly reporting requirements for supplemental payments made under fee-for-service (FFS) or waiver authority (i.e., uncompensated care pool and/or Delivery System Reform Incentive Payment programs authorized under Section 1115 demonstration waivers). It would also add new annual reporting to CMS that would identify the quarterly reported payments as well as an individual provider’s total Medicaid FFS base payments, Disproportionate Share Hospital (DSH) payments and other supplemental payments, along with its contributions to the non-federal share through provider taxes, IGTs or other mechanisms. States would also be required to renew their state plan amendments (SPAs) for supplemental payments every three years.

The new requirements are designed to improve transparency and CMS monitoring related to Medicaid payments and financing; however, it is not clear whether the proposed data requirements would be accurate and informative. The data would not be audited, and even if accurate, it may not provide CMS with sufficient insight to identify the supplemental payment and financing mechanisms that the proposed rule is attempting to prevent. Annual payments to hospitals and other providers vary from year to year for a number of reasons, including the timeline by which states and providers reconcile and adjust claims. Swings from year to year may be indicative of new or higher payments or payment rates, or could simply be the result of the timing of the flow of funds. Additionally, the new reporting requirements would add substantial administrative burden for states to report and for CMS to review.

Implications of the Proposed Rule

The proposed rule’s underlying thesis is that non-federal share financing arrangements and supplemental payments are often “shady recycling schemes” that “drive up taxpayer costs and pervert the system.”5 While such schemes do exist, many financing arrangements are appropriate and statutorily authorized arrangements that (at least partially) compensate for low Medicaid base payments that are far below the cost of care. The proposed rule attempts to limit these outlier “recycling schemes” by setting new rules and requiring more data to inform CMS’s determinations. However, the proposed new requirements and wide latitude granted to CMS to assess these arrangements could hamper states seeking to rely on legitimate methods of payment and revenue to finance coverage and long-term care for more than 70 million people enrolled in Medicaid and the Children’s Health Insurance Program.

In addition, some of the most consequential proposed changes—including provisions redefining governmental providers, limiting the sources of IGTs to tax revenue (or state appropriations) and clarifying how CMS identifies a hold harmless arrangement—would take effect upon the rule’s finalization, rather than allowing for a transition period, creating major upheaval for states.

The public comment period for the proposed rule is open through January 17, 2020.

1 The proposed rule affects non-Disproportionate Share Hospital (DSH) supplemental payments in fee-for-service (FFS) Medicaid (i.e., supplemental payments made under the upper payment limit (UPL), including graduate medical education (GME) payments made under the UPL) and payments made under Section 1115 demonstration authority. The proposed rule generally does not impact pass-through or directed payments in managed care authorized under 42 CFR § 438.6.

2 “States’ Increased Reliance on Funds from Healthcare Providers and Local Governments Warrants Improved CMS Data Collection,” GAO, July 2014, available at:

3 42 CFR § 447.272 and 447.321. UPL payment rules require Medicaid FFS payments to be no more than a reasonable estimate of what Medicare would have paid for the same services. The UPL is calculated in the aggregate for specified categories of providers. States are permitted to make supplemental payments to individual providers that exceed what Medicare would have paid, so long as aggregate payments for the class do not exceed the UPL.

4 CMS, “Federal and State Oversight of Medicaid Expenditures,” March 18, 2013, available at: In 2013, CMS issued subregulatory guidance requiring states to submit annual UPL demonstrations, establishing that total Medicaid payments to a class of providers, including supplemental payments, would not exceed a reasonable estimate of what Medicare would have paid. While the calculations are performed in aggregate at the class level, the guidance required states to report the information on a provider-specific basis. Starting in state fiscal year 2019, CMS required states to submit UPL demonstrations on templates approved by the Office of Management and Budget in an effort to standardize UPL calculation methodologies and data elements.

5 CMS, “Trump Administration Proposes Historic Steps to Strengthen Oversight and Fiscal Integrity of the Medicaid Program,” November 2019, available at:



pursuant to New York DR 2-101(f)

© 2022 Manatt, Phelps & Phillips, LLP.

All rights reserved